The Age of Stagnation is a valuable contribution to the growing corpus of critical literature on the ‘financialisation’ of the world economy. It takes a sweeping view of the ongoing slowdown, linking the shenanigans of global finance (the author as an ex-banker is at his best here) to energy, environmental and demographic constraints to growth. What emerges is a grim future of debt outpacing growth, leading to a catastrophe. The central point of the book is: Get real, adjust economies and lifestyles.

The book shows that the addiction to debt and the power of the banking sector has only increased after the outbreak of the global financial crisis (GFC). The US, the EU and Japan are in a trap because debt weighs down future growth prospects, and the way out is certainly not cheap debt as is borne out by their egregious monetary easing experiments. Due to constraints arising from natural resources, diminishing returns from innovation and an ageing world population, growth cannot happen at rates to make debt redemption easier. The world is running up debt to repay debt — till when?

Bubble economy Satyajit Das belongs to a growing community of sceptics who have taken, to use NYU economist Nouriel Roubini’s blurb on the book jacket, “the knife to global finance and financiers to reveal its inner workings without fear or favor”. The fact that the symptoms of 2007-08 have bounced back in 2016, with the IMF issuing dire forecasts for this year, gives rise to a question: Have efforts to clean up the banking sector by curtailing shadow banking activities after the GFC come to nought?

Das does not address this, even as he elaborates on what is now not disputed anymore — that quantitative easing has driven up stocks and bond prices rather than stimulating jobs, thanks to a cosy nexus between the banks and big corporates, with small industry being left out of the party.

As Das points out, Ben Bernanke was off the mark when he suggested that the wealth effect would lead to incomes all round. What the US is faced with now is extraordinary, in-your-face inequality, with only a select few raking it in and the middle-class shrinking rapidly.

With cheap credit, corporates focused on purely financial methods to create value for shareholders — such as share buybacks, “mergers, acquisitions, spinoffs and…a program of paying the good employees to leave”.

Das explains: “A large banking system is not necessarily problematic. (But it) does create problems when its role expands beyond support for the real economy…The drive for growth and higher profitability leads banks to take greater risks.” And, zero interest rates create these adverse incentives — a bloated financial sector vis-a-vis the real economy.

Washington Consensus A crucial question which is not asked is whether this zeal to grow is linked to the bank being a private corporation with a compulsion to post shareholder returns. This is relevant to India as well — if our banks did not lose their balance during the tsunami of 2008, possibly because they are government-run, is that strength being compromised now? Politicians such as Bernie Sanders and Jeremy Corbyn enjoy popular support for raising such questions; this tells us that the privatisation-efficiency optimisation model (called the Washington Consensus), promoted after the collapse of the Soviet Union in the late 1980s, has lost its appeal.

The book’s strength lies in the manner in which facts have been integrated, including useful references to economic history. This makes it a comprehensive account on the crisis years and after. Das has done well to explain the arcane complexities of banking in accessible prose, with literary, philosophical and popular anecdotes. For example, Ponzi schemes, an expression that is often used carelessly, are explained lucidly, citing Hyman Minsky. “In the early stages of a business cycle, money is only available to creditworthy borrowers whose income can meet the principal and interest on the debt…As the cycle develops, lenders finance borrowers, whose incomes cover interest payments but not the principal… Finally, lenders finance borrowers whose income will cover neither the principal nor interest on repayments, relying on increasing asset values to service the debt, a phase known as Ponzi finance. The cycle ends when the supply of money slows or stops.”

Connecting the dots How does one get off the perilous roller-coaster of debt-driven growth? Das takes a welcome distance from growth fetishism: “Low economic growth rates and low inflation would not normally be an issue, helping resolve pressing problems such as carbon emissions and availability of food and energy. But low growth, low inflation and high levels of debt are incompatible.” He cites the example of how Iceland bounced back after 2007-08 to suggest the way forward. It allowed big banks to fail, which led to the implosion of the financial sector and a rebalancing in favour of the real economy — a return to agriculture, fishing and tourism.

Extending this worldwide would mean simpler (vegetarian, he recommends) lifestyles to adjust to the reality that high world growth (and servicing of debt) cannot go on. Das shuns the shallow positivism of the day by explaining that the benefits of computing and telecommunications are minuscule compared with the first two phases of the industrial revolution. The ‘Great Moderation’ of Bernanke is a bubble in which the powerful have developed a vested interest.

Das does well to link up finance and energy, but largely skirts public finance issues. He is surprisingly dismissive of Thomas Piketty’s work on inequality and is lukewarm to Piketty’s idea of raising direct taxes as an instrument to combat inequality. He appears to view inequality as a fallout of ‘financialisation’ to the exclusion of other forces.

The fact that policies ushered in by the Washington Consensus could have also played a role in empowering finance capital, apart from easy money, does not come within Das’ radar.

He cites an IMF study on the lack of clarity on fiscal multipliers, saying it may be overestimated with respect to fiscal expansion and vice versa. This unease over fiscal stimulus does not square with his concern for social security. Das does not dwell much on India, save briefly endorsing a shift to reforms without making his case.

Gerard Epstein of the Political Economy Research Institute, University of Massachussetts, explains: “Financialization, as it has evolved in the US, has contributed to short-termism and impatient capital (emphasis added), diversion of resources to speculative investments, and increases in risks for most workers and middle class investors.” This also leads to “the desperate need for workers and middle class citizens to find vehicles for saving because their defined benefit pension plans from business and government were being eroded”, a point that Das explores differently. The impact of ‘short-termism’ on the social fabric is a very serious concern.

John Kenneth Galbraith’s wry writings on the excesses of corporate power, and the obfuscation of facts and the manipulation of public opinion by CEOs and Fed Reserve bosses are very relevant to our times.

And, more so in a supposedly rising India that has embraced the idea of a liberalised financial sector. It is also besotted by high growth, an idea that has outlived its time.

MEET THE AUTHOR

Satyajit Das is a former banker with over 35 years’ experience in financial markets. He is credited with predicting the financial crisis in 2006. In 2014, Bloomberg nominated him as one of the 50 most influential financial thinkers in the world.

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